The Four Critical Questions of Ownership
Tactics from the Owner's Box
Listen to this episode in full here - 7 minutes
The Four Questions
By now, you have likely realized that this podcast and newsletter is not about ownership alone. Instead, what we really want to know is what it means to be a strategic owner.
But here is the problem. People throw out the term “strategy” all the time. In its breadth of use, it has become almost meaningless. In the context of ownership, we know even less!
So, what does it all mean? What does it mean to pursue the ownership of a company— whether a start-up, a small business, a holding company, or a multi-generational operation — with a strategic hat on?
In today’s tactics from the Owner’s Box, we introduce the four critical questions for strategic owners – questions of What, How, When, and perhaps most importantly, Why.
Strategy at LVMH and Alinea
Given our last episode focused on fashion (Stuart Weitzman) and we have already interviewed a few culinary entrepreneurs (Danny Meyer & Ari Weinzweig, Jeremy King), let’s stay with these sectors for a moment to explore.
Take LVMH. The European family-owned company controls about 60 subsidiaries and manages 75 some-odd luxury brands. This includes many you might be aware of: Louis Vitton, Tiffany, Christian Dior, Marc Jacobs, Sephora, TAG Heuer.
But if this is the LVHM design, what does it mean for them to be a strategic owner across this portfolio?
In part, it means they are being strategic about what is owned. Some brands might fit in this mix, but others might detract from their focus or returns. Beyond the question of what is owned, strategic ownership has implications for how the family behind this firm approaches governance. To be strategic is to raise questions of whether the family should be leading the business as an owner-operator or guiding the company from the board room or owner’s box. To be a strategic owner is to ask whether it makes sense to bring in Pharrell Williams to be the creative men’s director of their flagship brand as they did in 2023, for example.
But the lessons drawn from LVMH are not limited to the largest fashion house in the world.
Let’s make our example smaller and perhaps a bit more approachable. Say you own a restaurant… or maybe two. For your company, do you own the real estate, or do you prefer to rent? Like LVMH and their choice of acquisition, this is also a question about what is owned. Moving beyond the what, as a restauranteur, you might need to wrestle with how closely you link the restaurant’s brand to your personal name and identity. In other words — a choice of “Peter’s Burgers” versus “St. Louis’ Best Burgers & Fries.” And if you have the good fortune of people loving your product, are there any ways to protect its “intellectual property,” if it has anything of the sort? Unlike the what focus, each of these situations highlights the importance of how you approach this work.
In the restaurant space, the three Michelin-star restaurant Alinea in Chicago provides an interesting case. In 2007, two years into their work together, owners Nick Kokonas and Chef Grant Achatz received an offer from a major US cookbook publisher to bring their book to market. The offer included a $125,000 advance against royalties and a complicated setup where they received 8% for the first 15,000 copies, 10% for the next 15,000, and 12% thereafter. They also had to do a 5,000 copy buy-back in the first 12 months. As Nick started doing the math, the economics didn’t work out. The publisher seemed to be taking little risk and yet earning a great deal of the upside.
In response, Kokonas and Achatz ended up renegotiating a deal with a smaller publisher, 10 Speed Press. This offer had no advance, the publisher paid upfront printing, and 75% of the wholesale went to the restaurant, along with a few other details.
The new deal worked great. While it took a year to recoup the upfront investment, by 2017, the book had sold over 100,000 copies, was in its 6th edition, and had won a James Beard award for best cookbook.
But interestingly enough, as Nick describes in a Medium post, “Why we are self-publishing the Aviary Cookbook,” the math and industry changed for the next book—and they decided to go it alone.
Each of these examples highlights the challenge of knowing what it means to be a strategic owner – whether in luxury fashion, a mom-and-pop retailer, or a restaurant group becoming a publisher.
Returning to the Key Four Questions
Let’s see if I can introduce a framework to help break down the complexity.
In 2020, Nicolai Foss and colleagues wrote an academic piece on what they call “ownership competence.” The academics put it like this. Being a competent owner is a combination of knowing what to own in ways that match your core competence. It is then knowing how to own it, which is really about governance and leadership. And finally, competence is knowing when to own and when to sell, which is all about timing.
Let’s use our example of the Chicago restaurant group to play this out.
From a WHAT perspective, Alinia has 7 different companies under its broader umbrella. This includes five restaurants, a design group that has been involved in projects like the books, and Tock, the restaurant reservation system – a tech platform.
Within this portfolio, being strategic in ownership means being intentional in identifying the entities that best fit the capabilities of the owners and align with the other entities owned. For example, something might be attractive to own because it creatively aligns and supports the larger portfolio. Alternatively, something might make sense because it performs differently in distinct market conditions and, thus, reduces risk as market conditions move. As an example, a successful restauranteur friend of mine told me that they own their buildings because, ultimately, they know that every restaurant will fall in and out of favor, but owning the land provides a more stable growth trajectory over time.
Decisions about HOW are linked to how to best lead those groups. One key question is who runs the company. While the owners can obviously run the entity themselves, they might also realize that they lack the competence to do so. A chef, for example, who now has a tech or design platform might rightly realize that the skills to do one do not match the needs of the other. The decision to hire a professional manager or to build a board with a distinct necessary competence is ultimately a question of how ownership is approached.
For Foss and colleagues, the third question of WHEN is all about timing. When to buy and when to hold. For a restaurant group, timing is inevitably shaped by the economics of the industry. Discretionary high-dollar experiences like fine dining come in and out of style based on people’s comfort with the broader economy. Fast casual food has eaten into some of the fine dining market over the last decade — a factor that might also change the decision about what to buy, or what to hold over time.
One unique challenge with timing is that it is hard to know the difference between prudent patience demonstrated by long-hold strategies like those of Warren Buffet and Charlie Munger at Berkshire Hathaway and what is the irrational optimism of holding on to something too long.
But at the very tail end of their article, Foss and colleagues conclude that we still know very little about the reason people own things beyond economic value alone. In my experience, though, this is a big part of why people pursue ownership. They have built a value-creating company, yes, but the company creates value beyond dollars alone. The value might be reputation. It might be the value for the employees. It could be something about how their company is engrained within a community. Being clear about the WHY is key to all of this as well and will have implications for each of the remaining three questions.
So, there you have it. Being a strategic owner is about answering four questions… what you own, how you own it, when you own it, all linked together with a big question of why you want to own something in the first place. Getting answers to these questions is a start toward being a bit more strategic from the owner’s box.